Did you know you can benefit from R&D tax incentives as an Australian business owner? These reduce your tax bill substantially and help you manage cash flow and become more profitable, even as you invest in new lines of research and development.
But how do they work? And why are they important? Let’s take a look.
R&D Tax Incentive Benefits
The government introduced the R&D Tax Incentive (R&DTI) several years ago to boost the Australian economy. The scheme aims to spur private investment beyond baseline levels, helping companies become more efficient and productive.
The R&D Tax Incentive benefits you may be eligible to receive depend on when you conducted your R&D. Different rules apply on either side of 1 July 2021 but are generally quite generous.
After 1 July 2021
If your company or “R&D entity” made less than $20 million in turnover after this date, the refundable amount from R&D spending is the corporate tax rate plus an 18.5% premium. You can use this money to reduce your tax liability significantly, and in some cases to zero.
For example, suppose you run a business with less than $20 million in turnover and spend $100,000 on R&D activities that qualify under the scheme. In this situation, you can claim a tax offset equal to your conventional corporate tax bill plus the 18.5% premium. Therefore, you could reduce your taxes by as much as $43,500 (assuming a 25% corporation tax rate).
For companies with a turnover of more than $20 million, it is a similar story. However, the offset percentage depends on your“R&D intensity” – or how much research and development you're doing.
You can receive:
- A non-refundable R&D tax offset equal to your corporate tax rate plus an 8.5% premium up to 2% R&D intensity
- A non-refundable R&D tax offset equal to your corporate tax rate plus a 16.5% premium for R&D intensity above 2%
Before 1 July 2021
Before 1 July 2021, businesses faced different tax offset rules under the R&DTI. Companies with annual turnovers of less than $20 million could earn a 43.5% refundable tax offset.
For example, suppose your corporate tax liability was $30,000 for the 2020-2021 tax year. Spending $100,000 on R&D implies a refundable tax offset of $25,000 in corporate taxes and a further $18,500 offset premium for $43,500 in total offsets. Then, you could subtract all your tax liability and expect to receive a payment of $13,500 from the government.
Companies with turnovers of more than $20 million could benefit from a non-refundable tax offset of 38.5%. Therefore, they could use it to wipe out their tax liability, but they wouldn’t get a cash payment from the government.
Are You Eligible For R&DTI?
Your business must meet several criteria to be eligible for R&DTI under the Income Tax Assessment Act 1997 rules. However, we advise caution. The government requires companies to self-assess their eligibility at every stage, so you can’t rely on an external body to vet your claims before you apply offsets to your accounts. As such, using the assistance of qualified accountants is essential.
To qualify for tax incentives, you must first engage in eligible R&D activities (which the authorities define as sub-components of R&D projects). These activities must support the core R&D effort or support it in some way.
Examples of eligible R&D expenditure include things like R&D staff wages, the cost of laboratories and materials, R&D-related overheads, and contracted services. You can also include things like data analysis and testing costs. However, be careful to avoid other business costs, like fuel expenses, that wouldn’t qualify.
Once you define your R&D spending, keep detailed records. These provide your expenditures on research and development and demonstrate you are using the tax offset facilities legally.
Finally, you have to spend more than $20,000 on eligible R&D activities in the financial year to qualify. You can only claim the offset on less than this if a Research Service Provider (RSP) conducted the R&D activity.
How To Apply
You can apply for R&D tax incentives using the government’s online service with your mGovID and quoting your company ABN. For bespoke support and guidance to meet the criteria the R&DTI requires, feel free to reach out to us at enquiry@primefinancial.com.au or fill out the form below.
